Union Budget 2023 removes preferential tax treatment of Market-Linked Debentures

Changed tax treatment of Market-Linked Debentures

Union Budget 2023 removes preferential tax

The Union Budget 2023 made some welcome changes to the income tax rules and the new regime. It also noticed the unfair tax advantage given to some avenues and changed the rules. One avenue that fell under the purview of the latest budget and suffered a major change was Market-Linked Debentures. Let’s understand –

What are Market-Linked Debentures?

Market-Linked Debentures, or MLDs as they are called in short, are listed securities linked to an underlying security, like an index or government security. Depending on how the underlying security has performed, the Market-Linked Debenture offers a return on maturity.

While returns depend on the performance of the financial markets, most MLDs come with a principal guarantee. This means the principal is repaid on maturity if the underlying security trades at a loss.

MLDs require a minimum investment of Rs.25 lakhs. They are issued by entities with a net worth of Rs.100 crores. The tenure ranges from 13 months to 60 months. Market-Linked Debentures are regulated by the Securities and Exchange Board of India (SEBI). They are a popular mode of raising funds among Non-Banking Financial Companies (NBFCs) and other financial institutions.

Related - Know the main differences between bonds and debentures

Tax treatment of MLDs

Before the Union Budget 2023 was presented, Market-Linked Debentures enjoyed long-term capital gains tax (LTCG). The returns earned on the maturity of the MLDs were taxed at 10% without indexation.

However, the latest budget has changed the rules. Per the latest changes, from the financial year 2024, MLDs will fall under the purview of short-term capital gains tax. This means that returns earned from MLDs will be taxed at the investor’s tax slab, which, in most cases, will be 30% since these avenues are usually picked by High Net Worth Individuals (HNIs).

Here’s q quick example to understand the changes in taxation rules on MLDs –

Say, you buy a Market-Linked Debenture worth Rs.50 lakhs. On maturity, you get Rs.55 lakhs on redeeming the security. The return earned is Rs.5 lakhs. Here’s the tax implication on the return –

Tax treatment of MLD

How the change will impact investors?

Market-Linked Debentures were popular among HNIs and affluent investors because of their tax benefits. Such investors invested in equity-linked MLDs to enjoy attractive returns and also save tax.

With the new proposals, the higher taxation will dent the prospective returns from MLDs, making them less favourable among investors. While it will bring parity in taxation, it might act as a deterrent for new investors.

So, know these changes if you have invested in Market-Linked Debentures or are planning to invest in them.

Related - Here's what you need to know about non-convertible debentures.

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